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American Capital Agency Corp. Message Board

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  • yourbestfriendintheworld yourbestfriendintheworld Mar 27, 2012 1:21 PM Flag

    Why the volatility to the downside in AGNC today?

    The "rates are staying low" thing is more complicated than the "run if rates rise" bunch are letting on.

    They're actually setting up an irrational dip in the stock price with that talk.

    The fact is, if rates rise, the yield curve will steepen. BV of current assets will drop, but BV isn't the determinant of value of the company, income is. BV is just a floor.

    The BV hounds and the "rates are rising, run!" hounds will take the stock down.

    But income frorm those assets will remain the same, and the steep yield curve will add high-performing assets to the book, sending EPS through the roof. The div will go up, and the lower stock price the nellies gave us will make the yield go north of Santa Claus's garage.

    The only -- only -- true risk here, is if, after all this happens, the economy gets way hot and the Fed is forced to flatten the yield curve or worse. Then the old assets may not be able to find short-term rates below the mortgage rate they collect. Borrowing to keep them leveraged could end up costing more than they bring in. They'd be an expensive drain unless the leverage is unwound, by selling them off at their lower value. And with an inverted yield curve it'd be impossible to make money even on new assets. The whole system would have to be dismantled, hopefully before it turns into a losing rather than earning system, and hopefully it will be telegraphed to the brain trust who will hedge it to cushion the blow.

    But what's the time horizon for an inversion of the yield curve, in a climate where real estate is picking up value while unemployment remains high? Years? Decades? It's certainly not months.

    Fearing interest-rate rises is only half the story. Fear short-term rate rises. But love long-term rate rises.

19.26+0.04(+0.21%)Jul 31 4:00 PMEDT